Trade gap crowns Tories with irony

By
Alexander MacLeod, contributor /
September 5, 1988

London

MARGARET THATCHER'S government, which slashed income taxes last March, is under pressure to raise them again. A tax increase is seen as a way to lower the temperature of Britain's overheating economy and to shrink a trade gap that experts say has reached ``horrible'' proportions.

A rapid widening of the current-account deficit has added an unwelcome chapter to the almost unbroken economic success story of Nigel Lawson, chancellor of the exchequer. The current-account deficit shows the difference between what Britain earns and spends. The July trade figures showed a gap of 2.1 billion. That brings the deficit for the year so far to 8 billion - double Lawson's predicted deficit for all of 1988.

The July figures forced Mr. Lawson to order a 1 percent rise in bank interest rates. Lawson claimed that everything was under control, and that the situation was the result of healthy growth in the economy. But the interest rise was the eighth in 10 weeks. In June, borrowers were paying 7.5 percent on loans; now the rate is 12 percent and likely to rise higher.

In his March budget, Lawson lowered the basic rate of income tax to encourage initiative and enterprise in the business sector. But the immediate effect appears to have been a collective decision by many private citizens and industrial organizations to go on a spending spree.

Bank lending expanded rapidly as house and new car purchases increased. Manufacturers began stocking up on new equipment, much of it purchased from abroad. All this activity overtook the Treasury's forecasts and gave Lawson no choice but to take corrective action.

The opposition Labour Party has been quick to point out that Mrs. Thatcher's economic doctrines give the government only a limited range of short-term remedies. Lawson has consistently argued that changes in interest rates are the best economic regulator. But Labour leader Neil Kinnock has begun to suggest that rapid interest rate rises will fuel inflation, which Thatcher is pledged to contain.

Labour is arguing for credit restrictions and wants to see Lawson increase taxes. There is a strong political element in this: If he is forced to do so, the middle classes who benefitted from the chancellor's last budget will blame the government.

The irony of the trade-gap crisis is that the Thatcher government shows every sign of being the victim of its own economic success. The national growth rate is running at about 4 percent - one of Europe's highest.

Britain is entering its political season, with annual conferences of the main political parties and the trade unions set for the next few weeks. The prime minister had hoped to use the conference of her Conservative Party as a launch-pad for a new phase of Thatcherism. Instead she may have to make excuses for her chancellor and begin preparing the political ground for a policy shift, including tax rises.